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Senate panel discusses ways to improve pension structure

On Thursday the Senate Committee on Health, Education, Labor and Pensions (HELP) conducted a roundtable discussion on the problems facing pension plans and ways to improve pension plan structure and administration. HELP Committee Chairman Tom Harkin (D-IA) deemed the current decline of participation in defined benefit plans an “underreported crises.” To this end, the Committee posed a number of questions to a panel of pension experts, including what should an ideal pension system look like, and how could pension plans be redesigned to make them easier and more attractive for businesses.

As for the type of pension system that should be implemented, Harkin put forth a proposal that would include, among other features, automatic enrollment with an opt-out feature; universal access to privately-run pensions; increased portability; and ways to ease an employer’s fiduciary responsibility. Ranking member Sen. Mike Enzi (R-WY), however, expressed concern at the outset that making required contributions to pension plans would be troublesome to small employers, as they already make required contributions to Social Security.

The panel of eight pension experts offered their own suggestions, many of which overlapped. Some proposed features of future pension plans include the following:

Some argued that participation in an employer’s pension plan should be mandatory, while others advocated for voluntary participation only.

Several panelists emphasized that the plans need to be professionally managed; doing so would relieve employers of some of their fiduciary responsibilities.

Some suggested that employees must work for at least a year before becoming eligible to participate in an employer’s defined benefits plan, which should have a 5-year vesting period.

The pension structure should provide for shared responsibility among employers, employees, and the government for lower-income workers.

Many panelists said the focus should be on defined benefit versus defined contribution plans, as they have lower risk for employees. Others advocated for a broader focus on strengthening all types of retirement plans, as the foundation for current retirement plans is “not perfect, but not broken.”

The plan should ensure adequate contribution rates and encourage broad participation. To this end, employees should be made aware of the benefits and value of defined benefit plans to encourage participation.

Measures should be included to ensure financial transparency.

As for what can be done to encourage employer participation, panelists offered the following input:

The rules and regulations implementing retirement plans should be simplified to reduce complexity and administrative burdens on employers.

Required pension notices and disclosures should be streamlined, and electronic delivery of these notices should be encouraged.

Employers should continue to receive tax incentives related to the provision of pension plans. Additional tax credits should be offered.

Some panelists were in favor of reducing contribution limits, while another panelist expressed concern that doing so would amount to an increased and unwarranted tax subsidy of wealthier income earners.

One panelist claimed that employers should be able to provide additional retirement benefits without costly testing, such as medical and qualifications testing.

Another panelist said the key to encouraging pension plan participation is to make it voluntary, flexible, and innovative.

Several panelists urged the creation of safe harbors for employers. Specifically, an employer should not have to face an ongoing fiduciary burden, but instead be able to satisfy its fiduciary duties by selecting a third party provider pursuant to government requirements.

Another panelist claimed that the number one problem many employers face is the volatility of defined benefit plans. Namely, when market interest rates change, the funded status of the pension plans change. As a result, in economic downturns, employers often have to put more funds into the pension plans. To remedy this, the panelists suggested more pension funding relief measures.

The problem of orphan pension fund liabilities many multi-employer funds face similarly warrants attention, according to at least one panelist.

Chairman Harkin concluded the roundtable discussion by acknowledging that any movement on pension reform will not likely be made this year, as Congress is adjourning this week and will not reconvene until after the November elections for a “lame duck” session. He noted, however, that he intends to push forward “aggressively” on this topic in the new year.

A full list of hearing participants and links to their written statements can be found here.

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